MarketView for May 24

Summary  

Share prices were lower in light volume on Tuesday as lingering concerns about a slowdown in growth more than offset gains in energy shares. The result was that all three major equity indexes ended the day in negative territory. Sectors associated with cyclical growth have suffered recently, with industrials down more than 5 percent so far this month. Occidental Petroleum rose 3.6 percent to $102.50, while Joy Global fell 1.8 percent to close at $85.96.

Volume was light, with about 6.6 billion shares changing hands on the three major exchanges, a number that was below last year's estimated daily average of 8.47 billion shares.

The S&P 500 closed at its lowest level in over a month and ended below its 50-day moving average for a second straight day. The 50-day MA, now at 1,324.59, could turn into a hurdle for the benchmark to reestablish a strong uptrend.

The Richmond Fed survey showed on Tuesday that manufacturing in the central Atlantic region stalled in May after expanding for seven months.

Energy shares were helped by a near 2 percent rise in domestic and Brent crude futures. Oil rallied after Goldman Sachs raised its forecast price for the commodity and as the euro erased some of the previous day's losses.

Gold shares advanced as bullion rose to its highest in about three weeks on concerns about a spreading debt crisis in the euro zone. Freeport-McMoRan Copper & Gold rose 3 percent to close at $48.82.

Shares of Russian Internet Company Yandex rose as much as 68 percent, hitting a session peak of $42.01, in the largest initial public offering in the Internet sector since Google. Yandex raised $1.3 billion in its IPO on Monday by selling 52.2 million shares for $25 each. The offering valued the company at about $8 billion. Yandex closed at $38.84, up 55.4 percent.

Deadbeats among the Beneficiaries

Contractors and businesses that received money through the 2009 federal economic stimulus plan owe billions in unpaid taxes to the government, the Government Accountability Office reported on Tuesday. According to the GAO, as of September 30, 2010, the total bill for unpaid taxes, including interest and penalties, was $330 billion. By law the federal government can make grants to entities that owe taxes, so some of the outstanding bills were racked up before the stimulus plan was passed.

Last month, the office reported that as of September 30, 2009, 3,700 contract and grant recipients owed $750 million in unpaid taxes. That represented nearly 5 percent of the 80,000 funding recipients.

The $819 billion stimulus plan, a combination of spending and tax measures intended to help bring the economy out of the longest and deepest downturn since World War Two, appropriated $275 billion for grants, contracts and loans. As of March 25, about $191 billion had been paid out, the GAO said.

Because of the way the Internal Revenue Service tracks taxes owed and paid, the estimate of unpaid taxes is likely too low, it said. The GAO said it had uncovered 15 cases in which recipients had not sent withheld payroll taxes to the Internal Revenue Service, a violation that totaled $40 million.

In one example, a nonprofit organization did not give the IRS payroll taxes from the middle to late 2000s and defaulted on agreements to pay the money in installments. Finally, the IRS filed tax liens against the organization to collect the more than $2 million it owed. The group received awards from the stimulus plan of more than $1 million for social services, the GAO said.

Of the plan's many moving parts, which included fund transfers to states and aid for the unemployed, contracts and grants were targeted mostly at direct job creation.

According to the federal government's web site, www.recovery.gov, from January through March, recipients reported that they had created 571,383 jobs through contracts, grants and loans. The website showed almost $265 billion had been awarded.

A Rise in New Home Sales

New home sales rose for a second straight month in April and supply was the lowest in a year, but an overhang of previously owned houses on the market could hurt any recovery. According to a report released by the Commerce Department on Tuesday, sales increased 7.3 percent to a seasonally adjusted 323,000 unit annual rate, the highest since December, also giving prices a lift. While the report showed some improvement across the board, new home sales are just bouncing along the bottom, and did not change views the economy remains mired in a soft patch.

Oversupply of used houses and a relentless wave of foreclosed properties are curbing the market for new homes, even as builders are keeping lean inventories. There were a record low 175,000 new homes available for sale last month, down 2.8 percent from the prior month. April's sturdy sales pace pushed the supply of new homes on the market down to 6.5 months' worth, the lowest since April last year, from 7.2 in March.

According to the National Association of Realtors, there were 3.87 million previously owned homes on the market last month. But economists estimate the figure could be anywhere between 7 and 8 million if foreclosed properties and those at risk of being repossessed by banks are taken into account.

With distressed properties -- which typically sell at about 20 percent below their value -- accounting for more than a third of transactions every month, economists are not optimistic about prospects for the market for new homes.

Economists had expected sales to set a 300,000-unit pace last month. All four regions recorded gains in sales last month. Compared to April last year sales dropped 23.1 percent. New homes account for about 6 percent of the overall housing market and residential construction is a tiny fraction of gross domestic product.

The weak housing market and high gasoline prices are hurting consumer confidence and holding back growth. Sluggish growth could see the Federal Reserve sticking to its ultra-easy monetary policy stance for a while.

Fed Governor Elizabeth Duke on Tuesday indicated she was unlikely to push for higher interest rates soon. St. Louis Fed President James Bullard said growth so far this year has disappointed. Perceptions that the economy is struggling to regain momentum after a weak first quarter were reinforced by a Richmond Fed survey showing manufacturing in the central Atlantic region stalled in May after expanding for seven months.

The Richmond Fed's manufacturing index came in at -6, a sharp contraction from the reading of +10 in April, dragged down by declining shipments and new orders. It added to a raft of data ranging from retail sales to industrial production that have painted a picture of a lackluster recovery, with employment the only bright spot.

While the median sales price for a new home rose 4.6 percent in April from a year earlier, economists saw the increase as unsustainable; citing the still wide gap between prices for newly built and used houses. That spread was at $54,200 in April, indicating previously owned homes are selling well below the cost of construction.